425 Broadhollow Road
Suite 416
Melville, NY 11747

631.282.8985
Freiberger Haber LLP
420 Lexington Avenue
Suite 300
New York, NY 10170

212.209.1005

Issues of Fact Surround Application of Business Judgment Rule

Print Article
  • Posted on: Feb 5 2025

By: Jeffrey M. Haber

It is not uncommon for courts to apply the law of another jurisdiction to resolve a dispute before it. In commercial matters, choice of law contract provisions and doctrines, such as the internal affairs doctrine, typically identify the law that should apply to the parties’ dispute.[1] Palella v. TMO VI LLC, 2025 N.Y. Slip Op. 30373(U) (Sup. Ct., N.Y. County Jan. 27, 2025) (here), is a recent example of a New York court applying the law of another jurisdiction – in that case, Delaware corporate law pursuant to a provision in the parties’ governing contract.

In Palella, plaintiff challenged defendants’ 2020 decision to enter into a management agreement whereby 58th & 7th Parking LLC (the “Company” or the “JV”) was guaranteed 10% of revenues from the operation of a Manhattan parking garage instead of exercising the Company’s option to secure a 49-year lease of that garage at market rate nearly one year into the coronavirus pandemic.[2] Plaintiff alleged that the Managing Members were not aware of the Company’s right to enter into the 49-year lease when they entered into the two-year management agreement that automatically converted to a one-year agreement terminable at will by the landlord.

Plaintiff brought the action derivatively on behalf of the Company. In plaintiff’s second amended complaint, plaintiff alleged two causes of action against defendants sounding in (1) breach of fiduciary duty and (2) gross negligence. Defendants moved to dismiss, claiming that, among other things, the business judgment rule barred plaintiff’s claims.

“To establish liability for the breach of a fiduciary duty, a plaintiff must demonstrate that the defendant owed her a fiduciary duty and that the defendant breached it.”[3] The plaintiff must also plead facts that, if proven, would overcome the presumption inherent in the business judgment rule.[4]  The business judgment rule “is a presumption that[,] in making a business decision[,] the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.”[5]

“In a business judgment rule case, the rule applies because the board is disinterested and thus has no apparent motive to do anything other than act in the best interests of the corporation and its stockholder.”[6] “An application of the traditional business judgment rule places the burden on the party challenging the [fiduciary’s] decision to establish facts rebutting the presumption.”[7] “If, under the facts pled in the complaint, any reasonable person might conclude that the deal made sense, then the judicial inquiry ends.”[8]  “Only when a decision lacks any rationally conceivable basis will a court infer bad faith and a breach of duty.”[9]

“The duty of the directors of a company to act on an informed basis … forms the duty of care element of the business judgment rule.”[10] The fiduciary duty of due care requires that a corporate fiduciary “use that amount of care which ordinarily careful and prudent men would use in similar circumstances, and consider all material information reasonably available in making business decisions.”[11]  “[D]eficiencies” in this decision-making process “are actionable only if the [fiduciary’s] actions are grossly negligent.”[12]

Under Delaware corporate law, gross negligence “has a stringent meaning …, one which involves a devil-may-care attitude or indifference to duty amounting to recklessness.”[13] “In the duty of care context with respect to corporate fiduciaries, gross negligence has been defined as a reckless indifference to or a deliberate disregard of the whole body of stockholders or actions which are without the bounds of reason.”[14] “By using this standard, Delaware entity law protects fiduciaries by requiring a greater showing for liability than what is required in other areas of civil law, as well as an even greater showing than what is required to obtain a conviction for criminal negligence.”[15] This framework means that “duty of care violations are rarely found” under Delaware law.[16] 

Based upon the foregoing legal principles and the allegations in the second amended complaint, the motion court denied defendants’ motion to dismiss.

The motion court held that “plaintiff’s allegations are sufficient to raise an issue of fact as to gross negligence.”[17] The court said that “[i] remain[ed] to be seen whether or not management made a conscious decision to trade in the lease.”[18] The court also said that it “remain[ed] to be seen whether it was gross negligence for management to trade in the lease, while failing to realize there was a 49-year lease right, in favor of a management contract, all at the height of the pandemic.”[19]

The motion court rejected defendants’ argument that one of the bases for plaintiff’s allegations arose from settlement discussions. “It matters not at this stage,” said the motion court, “that some of plaintiff’s knowledge regarding defendants’ lack of awareness about the 49-year lease option came from settlement discussions.”[20] Noting that “statements made in the course of settlement would not be admissible at trial,” the motion court nevertheless held that “it [was] sufficient at this stage [of the proceedings] to support plaintiff’s good faith allegations.”[21] “Discovery may provide further, admissible support for plaintiff’s allegations,” said the motion court.[22]

__________________________________

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.


[1] Royal Park Invs. SA/NV v. Morgan Stanley, 165 A.D.3d 460, 461 (1st Dept. 2018).

[2] Defendants are TMO VI LLC, Icon Intermediate Holdings, LLC, TMO LLC, Icon Parking 3, LLC, Icon Parking Holdings, LLC, Icon Parking Management, LLC, Icon Parking Services, LLC, and Icon Parking Systems, LLC. Defendants TMO VI LLC and Icon Intermediate Holdings, LLC were the managing members of the Company (“Managing Members”).

[3] Estate of Eller v. Bartron, 31 A.3d 895, 897 (Del. 2011).

[4] See Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1162-1164 (Del. 1995).

[5] MM Cos., Inc. v. Liquid Audio, Inc., 813 A.2d 1118, 1127 (Del. 2003) (quotation omitted).

[6] In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 598 (Del. Ch. 2010).

[7] MM Cos., 813 A.2d at 1127-1128.

[8] Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 892 (Del. Ch. 1999) (internal quotations omitted); see also In re Dollar Thrifty S’holder Litig., 14 A.3d at 598 (“[T]he court merely looks to see whether the business decision made was rational in the sense of being one logical approach to advancing the corporation’s objectives”).

[9] In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 34 (Del. Ch. 2014).

[10] Cinerama, 663 A.2d at 1164 n.13 (quotation omitted).

[11] In re Walt Disney Co. Derivative Litig., 907 A.2d at 749 (internal quotations omitted).

[12] Id.; see also Brehm v. Eisner, 746 A.2d 244, 259 (Del. 2000); In re Lear Corp. S’holder Litig., 967 A.2d 640, 651-652 (Del. Ch. 2008).

[13] Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *4 (Del. Ch. Aug. 26, 2005) (internal quotations omitted); see also Lear, 967 A.2d at 652 (“The definition of gross negligence used in our corporate law jurisprudence is extremely stringent.”).

[14] Walt Disney, 907 A.2d at 750; see also Solash v. Telex Corp., 1988 WL3587, at *9 (Del. Ch. 1988) (gross negligence under the business judgment rule requires that the challenged decision “be so grossly off-the-mark as to amount to reckless indifference … or a gross abuse of discretion”) (internal citations and quotations omitted).

[15] In re McDonald’s Corp. Stockholder Derivative Litig., 289 A.3d 343, 372 n.17 (Del. Ch. 2023); see also In re McDonald’s Corp. Stockholder Derivative Litig., 291 A.3d 652, 689 n.21 (Del. Ch. 2023) (“To hold a director liable for gross negligence requires conduct more serious than what is necessary to secure a conviction for criminal negligence.”).

[16] Walt Disney, 907 A.2d at 750.

[17] Slip Op. at *3.

[18] Id.

[19] Id. (citing McMullin v. Beran, 765 A.2d 910, 922 (Del. 2000) (allegations sufficient that directors breached duty of care when they approved the merger without adequately informing themselves)).

[20] Id.

[21] Id.

[22] Id.

legal500
bnechmark
superlawyers
AVVO
Freiberger Haber LLP
Copyright ©2022 Freiberger Haber LLP | Disclaimer
Attorney advertisement | Prior results do not guarantee a similar outcome.
425 Broadhollow Road, Suite 416, Melville, NY 11747 | (631) 574-4454
420 Lexington Avenue, Suite 300, New York, NY 10017 | (212) 209-1005
Attorney Website by Omnizant